Taiwan Semiconductor "Ignites" AMD

Taiwan Semiconductor's latest earnings report brings good news, as chip stocks rebound strongly and both AMD and NVIDIA reach new highs.

On January 18th, according to Taiwan Semiconductor's Q4 earnings report, the company achieved a net profit of TWD 238.7 billion, a 19% decrease YoY but a 13% increase QoQ. The revenue reached TWD 625.5 billion, exceeding expectations.

Boosted by the optimistic outlook for AI chip demand, chip stocks rebounded strongly overnight, outperforming the market and approaching the historical closing high. The Philadelphia Semiconductor Index and the semiconductor industry ETF SOXX rose by approximately 3.4% and 3.3% respectively.

As one of Taiwan Semiconductor's major downstream suppliers, AMD rose by over 1%, with a temporary increase of over 3% during trading, while NVIDIA's stock price reached a new all-time high.

Chip Demand Remains High, Expected to Return to Growth After Q1

After the release of the earnings report, Taiwan Semiconductor surged by 9.8%, leading the semiconductor sector.

In terms of business segments, Taiwan Semiconductor's HPC (High-Performance Computing) revenue grew by 17% in Q4, while smartphone revenue grew by 27%.

Taiwan Semiconductor stated that they expect strong demand for HPC applications, including generative AI, in Q1 2024, but the smartphone business may be weak.

Huang Renzhao, Vice President and CFO of Taiwan Semiconductor, said:

"Entering Q1 2024, we expect our business to be affected by the seasonality of smartphones, but this will be partially offset by the continued growth in demand for HPC-related applications."

With the increasing demand for high-performance computing, the competition for advanced chip processes, including Taiwan Semiconductor and Samsung, is gradually extending from 5nm to 3nm. In a previous research report, Jefferies analysts wrote:

"Taiwan Semiconductor is collaborating with almost all smartphone suppliers on 3nm technology."

"The company reiterated that its involvement in 2nm is much higher than in similar stages of 3nm, partly driven by AI-related applications."

The financial report also shows that Taiwan Semiconductor's 3nm chip business revenue accounted for 15% of its quarterly wafer revenue, significantly higher than the previous quarter's 6%. Revenue from 7nm and below chips accounted for 67%.

In terms of performance guidance, Taiwan Semiconductor expects first-quarter revenue to decline by around $18-18.8 billion, but it will grow in each subsequent quarter, with HPC being one of the key driving factors.

This means that as the AI wave continues to spread, the chip demand that has been weak last year is expected to rebound in the coming quarters, and the industry outlook is expected to recover.

Industry veteran Tim Ghriskey said:

"I think you will continue to hear discussions about artificial intelligence, which will translate into significant input growth for companies like Taiwan Semiconductor."

"This is a supply and demand-driven market for the semiconductor industry."

Boosted by optimistic prospects, AMD and NVIDIA's main supplier, Taiwan Semiconductor, have both reached new highs in their stock prices.

Bernstein analyst Mark Li said that Taiwan Semiconductor is expected to have artificial intelligence chips account for more than 10% of its revenue by 2027.

In a report to clients on Thursday morning, UBS analyst Jordan Klein wrote:

"In the semiconductor industry, it is expected that AMD, NVDA, and MRVL, the top chip manufacturers driven by the development of artificial intelligence, will see further buying waves."

Cowen & Co. analyst Matthew Ramsa continues to be bullish on AMD, raising its target stock price from $130 to $185, and stating that the company's MI300 chip, which focuses on AI applications, is "ready for substantial growth":

"After AMD officially launched MI300 in December, we are more confident that the MI300 product portfolio will enable the company to achieve long-term growth in the AI computing field."

NVIDIA still holds the top position. Ramsay pointed out that MI300 is becoming a "more powerful" alternative in the AI market, and NVIDIA is the absolute market leader.